The euro’s August gains have been relentless, taking it to a one year high against the dollar on Wednesday, but a cautious tone from Federal Reserve Chair Jerome Powell on Friday could turn that momentum around.
There’s about $2.29 trillion of turnover each day in the euro-dollar currency pair — around a third of all foreign-exchange volume globally. Because it’s so easy for sellers to find buyers, and vice versa, it has long been the easiest way for market participants to take a bearish punt on the US economy.
Every day for the past two weeks, money-managers betting the Fed is on the cusp of an interest-rate cutting cycle have snapped up the euro, according to Bank of New York Mellon. As the world’s biggest custodian bank, it has a bird’s-eye view of more than $45 trillion of assets.
Robo-traders are also in on the action. Managers deploying computer algorithms to chase the latest market trends have dumped between $70 billion and $80 billion so far this month. According to UBS AG, the euro has been one of the main beneficiaries.
That’s all fueled the euro’s 3% rally since the start of the month to as much as $1.1143 on Wednesday, its strongest since last July. It got an added boost after revised US jobs data bolstered bets for Fed rate cuts.
But as the world’s central bankers convene on Jackson Hole, and with European growth still lackluster, many fear the euro’s fortunes are about to turn.
All it would take is for Powell or his lieutenants push back against the scope of cuts implied by the market, strategists say. That would suggest US rates will stay higher relative to those in Europe, where reductions have already begun, burnishing the dollar’s appeal.
The euro is “the main beneficiary of the ongoing pullback in US rate expectations and the improvement in risk appetite,” said Geoff Yu, senior strategist at Bank of New York Mellon. “It’s not an outright euro-positive story, the current macro picture for Europe remains very weak.”
The single currency’s gains may have more to do with its superior liquidity than any fundamental change in the outlook for the region’s economy.
